Aly Energy Services, Inc. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

Commission File Number 033-92894

(713) 333-4000

(Registrant’s Telephone Number, including area code.)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x     No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨     No x

At November 13, 2019, the registrant had 3,822,329 shares of common stock, $0.001 par value, outstanding.

ALY ENERGY SERVICES, INC.

(A Delaware Corporation)

INDEX

PART I – FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

ALY ENERGY SERVICES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ALY ENERGY SERVICES, INC.

 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (in thousands, except share and per share amounts)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ALY ENERGY SERVICES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands, except share amounts)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ALY ENERGY SERVICES, INC.  

 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  

 (in thousands)  

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited)

NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations

Aly Energy Services, Inc., together with its subsidiaries (“Aly Energy” or the “Company”), is a provider of oilfield services to oil and gas exploration and production (“E&P”) companies operating in the United States (“U.S.”). Generally, the services we offer fall within two broad categories: surface rental equipment and solids control equipment and services. Our surface rental equipment includes a wide variety of large capacity tanks with circulating systems, associated pumps, and ancillary equipment. Our solids control equipment mainly consists of large centrifuges and ancillary components that can be integrated into a closed loop mud system. We operate in the U.S., primarily in Texas, Oklahoma, and New Mexico.

Throughout this report, we may also refer to Aly Energy and its subsidiaries as “we”, “our” or “us”.

Basis of Presentation

Aly Energy has two wholly-owned subsidiaries with active operations: Aly Operating, Inc. and Aly Centrifuge Inc. Aly Operating, Inc. has one wholly-owned subsidiary, Austin Chalk Petroleum Services Corp. We operate as one business segment which services customers within the U.S.

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of Aly Energy and each of its subsidiaries. All significant intercompany transactions and account balances have been eliminated upon consolidation.

Reverse Stock Split

On August 7, 2018, the Company effected a 1-for-20 reverse stock split of its common stock (“Reverse Split”), as approved by its Board of Directors and stockholders. All information in this Quarterly Report on Form 10-Q relating to the number of common shares, price per share and per share amounts, including such information related to options and the conversion feature of the Series A convertible preferred stock, have been retroactively restated to give effect to the Reverse Split. Please see Note 6 – Stockholders’ Equity.

Interim Financial Information

The unaudited condensed consolidated balance sheet as of December 31, 2018 has been derived from our audited financial statements. The unaudited condensed consolidated financial statements of the Company as of and for the periods presented are prepared in conformity with U.S. GAAP for interim financial reporting. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, these condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting only of normal, recurring adjustments) which are, in our opinion, necessary for a fair presentation of the information as of and for the periods presented. Interim results for the three and nine months ended September 30, 2019 may not be indicative of results that will be realized for the full year ending December 31, 2019.

Reclassifications

Certain reclassifications have been made to prior period unaudited condensed consolidated financial statements to conform to the current period presentation. These reclassifications had no effect on our consolidated financial position, results of operations or cash flows.

Merger with Related Party

On January 28, 2019, we executed an Agreement and Plan of Merger (“Merger Agreement”) with Permian Pelican Inc. (“Pelican”), a related party, pursuant to which Pelican merged with and into the Company (the “Merger”). By virtue of the Merger, each issued and outstanding share of Pelican common stock, 7,429 shares in aggregate, was converted into 387.858 shares of our common stock and each share of Series A convertible preferred stock was canceled. We issued an aggregate of 2,881,411 new shares of our common stock, representing approximately 75.4% of our outstanding common stock, with a value of approximately $14.4 million in consideration for all of the shares of Pelican common stock outstanding as of the Merger on January 28, 2019. The new shares of our common stock were issued directly to the individual shareholders of Pelican and, as a result, effective January 28, 2019, we no longer had a controlling shareholder. Please see Note 7 – Related Party Transactions.

Use of Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, and the amounts of revenue and expenses recognized during the reporting period. Areas where critical accounting estimates are made by management include:

The Company analyzes its estimates based on historical experience and various other indicative assumptions it believes to be reasonable under the circumstances. Under different assumptions or conditions, the actual results could differ, possibly materially, from those previously estimated. Many of the conditions impacting these assumptions are outside of the Company’s control.

NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), which we adopt as of the specified effective date. Unless otherwise discussed, management believes the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption.

Accounting Standard Adopted in 2019

Leases. In February 2016, the FASB issued accounting standard update (“ASU”) 2016-02, Leases and subsequently issued additional ASUs clarifying certain aspects of ASU 2016-02. ASU 2016-02 and related amendments have been codified as ASC 842. ASC 842 is effective for annual and interim periods beginning after December 15, 2018. We adopted this standard effective January 1, 2019 utilizing a modified retrospective transition by using the effective date as the date of initial application. Consequently, prior period financial information has not been adjusted and continues to be reflected in accordance with the Company’s historical accounting policy. In addition, the Company elected the following practical expedients:

The adoption of this accounting standard resulted in the recording of operating right-of-use (“ROU”) assets and operating lease liabilities of approximately $0.3 million as of January 1, 2019. The difference between the operating ROU assets and operating lease liabilities of approximately $6,000 was recorded as an adjustment to accumulated deficit. Please see Note 4 – Leases.

Revenue recognition. Revenue is recognized when performance obligations are satisfied in accordance with contractual terms, in an amount that reflects the consideration the Company expects to be entitled to in exchange for services rendered or rentals provided. Taxes collected from customers and remitted to governmental authorities are not included in revenue in the Company’s financial statements.

Performance Obligations

A performance obligation arises under contracts with customers to render services or provide rentals and is the unit of account. The Company accounts for services rendered and rentals provided separately if they are distinct and the service or rental is separately identifiable from other items provided to a customer and if a customer can benefit from the services rendered or rentals provided on its own or with other resources that are readily available to the customer.

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. A contract’s standalone selling prices are determined based on the prices that the Company charges for its services rendered and rentals provided.

Most of the Company’s performance obligations are satisfied over time, generally over a period measured in days or months. The Company’s payment terms vary by the type of products or services offered. The term between invoicing and when the payment is due is typically 30 days. We invoice customers once our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our revenue contracts do not give rise to contract assets or liabilities.

Rentals revenue consists of fees charged to customers for use of the Company’s rental equipment and, in certain cases, fees charged to customers for the use of personnel supplied by the Company to operate its solids control equipment over the term of the rental period, which is generally less than twelve months. These fees are primarily charged on a per day, per hour or similar basis.

Services revenue, including revenue generated by the transportation of equipment, rig-up/rig-down services and service calls, primarily represents amounts charged to customers for the completion of services rendered, including labor and supplies necessary to perform the service. Rates for these services vary depending on the type of services provided and are calculated on a per job, per hour, or per piece of equipment basis.

The Company expenses sales commissions when incurred because the relevant amortization period would be one year or less.

The following table presents our revenue disaggregated by revenue source (in thousands):

Accounting Standards Issued But Not Yet Adopted

Fair Value Measurement Disclosure. In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820) – Disclosure Framework - Changes to the Disclosure Requirement for Fair Value Measurement. This new guidance eliminated, modified and added certain disclosure requirements related to fair value measurements. The amended disclosure requirements are effective for all entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. We are evaluating the impact of adopting this guidance. However, we currently expect that the adoption of this guidance will not have a material impact on our consolidated financial statements.

Financial Instruments—Credit Losses. In June 2016, the FASB issued ASU 2016-13 Financial Instruments—Credit Losses (Topic 326), which introduced an expected credit loss methodology for the impairment of financial assets measured at amortized cost basis. It requires an entity to estimate credit losses expected over the life of an exposure based on historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. This guidance will take effect for public companies with fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the impact of adopting this guidance.

NOTE 3 — DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

Property and Equipment

Major classifications of property and equipment are as follows (in thousands):

Depreciation and amortization expense related to property and equipment for the three months ended September 30, 2019 and 2018 (restated) was $0.6 million and $0.7 million, respectively. Depreciation and amortization expense related to property and equipment for the nine months ended September 30, 2019 and 2018 (restated) was $2.0 million.

Intangible Assets, Net

As of September 30, 2019 and December 31, 2018, intangible assets of $2.8 million and $3.3 million, respectively, included assets associated with a trade name and customer relationships. Amortization expense was $0.2 million for the three months ended September 30, 2019 and 2018. Amortization expense was $0.6 million for the three months ended September 30, 2019 and 2018.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consists of the following (in thousands):

NOTE 4 – LEASES

The Company adopted ASU 2016-02 and the related amendments on January 1, 2019.

The Company leases certain equipment and facilities under both operating and finance leases expiring on various dates through 2023. The nature of these leases generally fall into two categories: real estate leases and equipment leases for surface rental equipment used in our operations such as tanks and pumps. The leases for surface rental equipment are with a related party, Permian Pelican Rentals, LLC (“PPR”). Please see Note 7 – Related Party Transactions.

For leases with initial terms greater than 12 months, we consider the leased assets as our right-of-use assets and record the related asset and obligation at the present value of lease payments over the term. We estimate our incremental borrowing rate, which is used to discount the lease payments, based on information available at lease commencement. For leases with initial terms equal to or less than 12 months, we do not consider the leased assets as right-of-use assets and instead we record them as short-term lease costs that are recognized on a straight-line basis over the lease term.

Some of our leases include escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments when it is reasonably certain the Company will exercise such options.

Operating and Finance Leases with a Related Party

On May 21, 2019, the Company entered into a leasing arrangement with PPR for 40 500bbl tanks. All the tanks are required to be upgraded and modified by Aly Energy prior to being placed in service. Aly Energy then bills PPR for all costs incurred to modify and upgrade the tanks. As of September 30, 2019, the company had completed the upgrades and modifications on 14 tanks. The remainder of the tanks will be delivered to the Company and completed within the next six months.

Each tank incurs daily rental charges based on a 365 (or 366) day year regardless of equipment utilization. The lease commences on the day that each completely refurbished tank is ready for shipment to a customer’s site.

Each tank is a separate identified asset that is capable of being used independently of the other tanks. As such, the Company records a separate lease for each piece of equipment under the PPR leasing arrangement.

Subsequent to May 21, 2019, PPR and Aly Energy entered into three amendments to the leasing agreement as follows:

Based on the Company’s assessments of lease classification, each of the tank leases were classified as operating leases and each of the DMP leases were classified as finance leases. The DMPs were classified as financing leases because the present value of the lease payments aggregate to an amount equal to substantially all the estimated fair value of the DMPs. The estimated fair value of the frac tanks was determined based on quoted market prices for similar tanks, as adjusted for differences in configuration. The estimated fair value for the DMPs was determined based on the cost of a new DMP, as adjusted for the upgrades added by the Company. The estimated incremental borrowing rate is based on the Company’s estimate of the rate at which a third-party lender would finance the purchase of equipment under a secured loan of a similar term to the leasing arrangement.

During the three and nine months ended September 30, 2019, we added $0.2 million of operating lease liabilities and $0.5 million of finance lease liabilities as a result of the commencement of 14 operating leases and six finance leases under the PPR leasing arrangement.

Balance Sheet Classification

The table below presents the lease-related assets and liabilities included on the balance sheet (in thousands):

Lease Costs

Rent expense is included in operating expenses or selling, general, and administrative expenses on the unaudited condensed consolidated statements of operations depending on the use of the asset being rented. The table below presents the rent expense recognized for the three and nine months ended September 30, 2019 and 2018 (in thousands):

Amortization expense and interest expense related to finance leases are included in depreciation and amortization and interest expense – related party, net, respectively, on the unaudited condensed consolidated statements of operations. The table below presents the interest expense and amortization expense recognized in connection with finance right-of-use assets for the three and nine months ended September 30, 2019:

The table below presents cash paid for operating leases and finance leases during the three and nine months ended September 30, 2019 (in thousands):

Other Information

The tables below present supplemental information related to leases as of September 30, 2019:

Maturities of Lease Liabilities

The table below reconciles the undiscounted cash flows for each of the first five years and the total of the remaining years to the finance lease liabilities and operating lease liabilities recorded on the balance sheet as of September 30, 2019:

As of September 30, 2019, under the equipment lease with PPR, we had approximately $0.5 million of operating right-of use assets and operating lease liabilities which had not yet commenced. These leases are expected to commence on or prior to March 31, 2020.

NOTE 5 — LONG-TERM DEBT – RELATED PARTY

Long-term debt – related party consists of the following (in thousands):

On June 30, 2018, the Company entered into the Third Amended and Restated Credit Agreement with Pelican (“Related Party Credit Facility”) which, among other things, (i) combined the outstanding balances on the delayed draw term loan and the term loan and initiated a required monthly principal payment of approximately $83,000 on the aggregate outstanding balance of the term loan, (ii) expanded availability on the revolving credit facility by $0.7 million while simultaneously reducing the aggregate availability under the other lines of the facility by the same amount, and (iii) extended the maturity date of the facility to June 30, 2021. Borrowings under the Related Party Credit Facility are subject to monthly interest payments at an annual base rate of the six-month LIBOR rate on the last day of the calendar month plus a margin of 3.0%. The obligations under the Related Party Credit Facility are guaranteed by all our subsidiaries and secured by substantially all our assets. The Related Party Credit Facility contains customary events of default and covenants including restrictions on our ability to incur additional indebtedness, pay dividends or make other distributions, grant liens and sell assets. The Related Party Credit Facility does not include any financial covenants.

Effective June 30, 2018, Pelican assigned and transferred its rights under the Related Party Credit Facility to an affiliated entity, PPF. Due to the common ownership interests of PPF and the Company, PPF is a related party.

Under the revolving credit facility, the Company has the ability to borrow the lesser of 80% of eligible receivables, as defined in the credit agreement, and $1.7 million. As of September 30, 2019, the Company had $1.7 million of borrowings outstanding and had no further borrowing availability under the revolving credit facility.

On July 24, 2019, a pre-existing leasing arrangement with Permian Pelican Rentals, LLC (“PPR”), a related party and a wholly-owned subsidiary of PPF, was amended to include the leasing of six DMPs. Based on the Company’s assessment, the leases for the DMPs are finance leases and, during the three months ended September 30, 2019, the Company recorded $0.5 million of finance ROU assets and finance lease liabilities in connection with the DMP leases.

NOTE 6 – STOCKHOLDERS’ EQUITY

Common Shares

On August 7, 2018, the Company effected the Reverse Split, a 1-for-20 reverse stock split of its common stock, as approved by its Board of Directors and stockholders. Under the terms of the Reverse Split, each 20 shares of common stock issued and outstanding as of such effective date was automatically reclassified and changed into one share of common stock without further action by the stockholder. In lieu of issuing fractional shares in connection with the Reverse Split, holders received the proportionate fraction of $7.00 per share in cash. The aggregate payment for all fractional shares was $231.35. Shares of common stock previously issued and held as treasury shares were escheated to applicable governmental authorities and, in connection with the Reverse Split, were reinstated as outstanding shares of common stock. All share and per share amounts in these unaudited condensed consolidated financial statements, including such amounts related to options and the conversion feature of the Series A convertible preferred stock, have been retroactively restated to reflect the Reverse Split.

On August 7, 2018, we filed an amendment to our certificate of formation reducing our authorized common shares from 25,000,000 to 15,000,000.

On August 20, 2018, our former Chief Executive Officer, Shauvik Kundagrami, exercised options to purchase 250,000 shares of common stock for an exercise price of $2.00 per share, or $500,000 in aggregate.

On January 28, 2019, in connection with the Merger, we issued an aggregate of 2,881,411 new shares of our common stock, representing approximately 75.4% of our outstanding common stock, in consideration for all of the shares of Pelican common stock outstanding as of the effective date of the Merger. Please see Note 7 – Related Party Transactions.

Preferred Shares

On August 7, 2018, we filed an amendment to our certificate of formation reducing our aggregate authorized preferred stock from 10,000,000 to 5,000,000 shares. Previously, the Company allocated 20,000 of the authorized preferred shares to be authorized Series A convertible preferred shares.

On January 28, 2019, by virtue of the Merger, each issued and outstanding share of our Series A convertible preferred stock was canceled.

Authorized preferred shares, with a par value of $0.001 per share, total 4,980,000 as of September 30, 2019 and December 31, 2018, respectively, of which, none were issued and outstanding as of September 30, 2019 and December 31, 2018.

NOTE 7 — RELATED PARTY TRANSACTIONS

Former Controlling Shareholder – Pelican

Beginning on January 31, 2017, Pelican had the power to vote the substantial majority of the Company’s outstanding common stock. Five of our seven board members, including two of our executive officers, and our chief financial officer held an ownership interest in Pelican.

As of December 31, 2018, Pelican owned 17,292 shares of Series A convertible preferred stock which was convertible into 2,881,400 common shares. On an as-if-converted basis, Pelican owned approximately 75.4% of our common stock (excluding the impact of options) as of December 31, 2018. The shares of Series A convertible preferred stock carried a liquidation preference of $1,000 per share or $17.3 million.

On January 28, 2019, we executed the Merger with Pelican pursuant to which Pelican merged with and into the Company and, as a result, effective January 28, 2019, we no longer have a controlling shareholder.

Related Party Lender – PPF

In January 2017, we entered into the Related Party Credit Facility with Pelican. Effective June 30, 2018, Pelican assigned and transferred its rights under the Related Party Credit Facility to PPF. Due to the common ownership interests of PPF and the Company, PPF is a related party.

In connection with our Related Party Credit Facility, during the three months ended September 30, 2019, we recorded principal payments and interest expense of $0.3 million and approximately $81,000, respectively. During the three months ended September 30, 2018, we recorded principal payments and interest expense of $0.2 million and approximately $92,000, respectively.

In connection with our Related Party Credit Facility, during the nine months ended September 30, 2019, we recorded principal payments and interest expense of $0.8 million and $0.3 million, respectively, and we borrowed an additional $0.7 million under the revolving credit facility thereby reducing availability under the facility to zero. During the nine months ended September 30, 2018, we recorded principal payments and interest expense of $0.2 million and $0.3 million, respectively.

Our consolidated balance sheet includes accrued interest under the Related Party Credit Facility of approximately $26,000 and $31,000 as of September 30, 2019 and December 31, 2018, respectively.

Related Party Vendor – Permian Pelican Rentals, LLC

PPR is a wholly-owned subsidiary of PPF, a related party. During the three and nine months ended September 30, 2019, the Company has entered into various leases with PPR to sub-rent tanks and pumps.

NOTE 8 – EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional shares of common stock that could have been outstanding assuming the exercise of outstanding stock options and restricted stock or other convertible instruments, as appropriate.

Due to the net loss incurred by the Company for the three and nine months ended September 30, 2019, the effect of incremental shares is antidilutive so the diluted earnings per share will be the same as the basic earnings per share. The calculations of basic and diluted earnings per share for the three and nine months ended September 30, 2018 are shown below (unaudited and in thousands, except for shares and per share data):

Unvested stock options under the 2013 Plan are excluded from the computation of basic and diluted earnings per share because they vest upon the occurrence of certain events as defined in the 2013 Plan. As of September 30, 2019, there were 11,706 stock options outstanding and unvested under the 2013 Plan.

Please see our Annual Report on Form 10-K for the year ended December 31, 2018 for additional detail on the options issued under the 2013 Plan and for detail on options issued under the 2017 Plan.

NOTE 9 – RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS

Prior to the issuance of the Company’s consolidated financial statements for the year ended December 31, 2018, the Company concluded that its previously issued consolidated financial statements for the years ended December 31, 2017 and 2016 and for the quarters ending March 31, 2018 and 2017, June 30, 2018 and 2017 and September 30, 2018 and 2017 should be restated due to accounting errors discovered in conjunction with certain remediation activities for our internal controls over financial reporting.

During the first quarter of 2019, we reviewed our existing fixed asset inventory, our current and historical fixed asset records, and the accounting for a significant transaction in 2016 in which we sold assets with a net book value of $18.6 million to Tiger Finance, LLC (“Tiger”). As a result of this review, we (i) identified certain assets which were included in the asset purchase agreement with Tiger and had not been written off in connection with the sale, and (ii) identified certain other assets which had been disposed of on or prior to December 31, 2016 which had not been written off at the time of disposal.

We determined it would be necessary to restate the financial statements for the years ended December 31, 2017 and 2016 and the quarters ended March 31, 2018 and 2017, June 30, 2018 and 2017 and September 30, 2018 and 2017. The adjustments to the consolidated statements of operations consist of an increased impairment and increased loss on disposal of assets in 2016 and a reduction in depreciation expense during all periods from November 1, 2016 through September 30, 2018. The adjustments to the consolidated balance sheet consist of a reduction of property and equipment, net in all periods to reflect the write-off of certain assets in 2016. The Company’s consolidated statements of cash flows had no changes to net cash flows from operating, investing or financing activities as a result of the restatement. The impact of the restatement to the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2018 was as follows (in thousands except per share data):

NOTE 10 – SUBSEQUENT EVENTS

On October 9, 2019, we filed an amendment to our certificate of formation reducing our authorized common shares from 15,000,000 to 5,000,000 and reducing our authorized preferred stock from 5,000,000 to 1,000,000.

On October 23, 2019, we executed a new real estate lease for our corporate office. The lease is expected to commence on February 1, 2020.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations is intended to assist you in understanding our business and results of operations together with our present financial condition. This section should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in “Item 1. Unaudited Condensed Consolidated Financial Statements” in this Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain statements and information that may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements which are not historical in nature, including the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” “may,” “project,” “plan” or “continue,” and similar expressions are intended to identify forward-looking statements.

Forward-looking statements are not assurances of future performance and actual results could differ materially from our historical experience and our present expectations or projections. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us, that may cause our actual results, performance or financial condition to be materially different from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. These forward-looking statements are based on our current plans and expectations and are subject to a number of uncertainties and risks that could significantly affect current plans and expectations, and our future financial condition and results. Known material factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, volatility in the price of oil, fluctuations in the domestic rig count, intense competition in our industry and the other risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2018.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report on Form 10-Q might not occur. We qualify any and all of our forward-looking statements entirely by these cautionary factors. You are cautioned not to place undue reliance on these statements which speak only as of the date of this Quarterly Report on Form 10-Q.

Overview of Our Business

Aly Energy Services, Inc., together with its subsidiaries (“Aly Energy” or the “Company”), is a provider of oilfield services to oil and gas exploration and production (“E&P”) companies operating in the United States (“U.S.”). Generally, the services we offer fall within two broad categories: surface rental equipment and solids control equipment and services. Our surface rental equipment includes a wide variety of large capacity tanks with circulating systems, associated pumps, and ancillary equipment. Our solids control equipment mainly consists of large centrifuges and ancillary components that can be integrated into a closed loop mud system. We operate in the U.S., primarily in Texas, Oklahoma, and New Mexico.

How We Generate Revenue and the Costs of Conducting Our Business

We generate our revenue by providing drilling-related support services to E&P companies operating in onshore basins in the U.S. Our revenue streams include: (i) rental services - revenue derived from the rental of equipment and on-site operators of such equipment, (ii) rig-up/rig down services – revenue derived from the rig-up/rig-down of our equipment at the customer site, (iii) transportation services – revenue derived from the hauling of our equipment to and from the customer site, and (iv) other - revenue derived from the sale of consumable items, including chemicals. Fluctuations in the mix of services are driven primarily by the timing of and frequency with which our respective customers move their rigs from well to well and by the number of mobilizations and demobilizations of our equipment. The contribution of each revenue stream to total revenue is shown in the table below:

Our total revenue fluctuates with the utilization of and the prices we charge for our equipment and services. Utilization of our equipment is generally largely dependent on the U.S. land-based drilling rig count (“Rig Count”) as it is typically representative of the level of activity of E&P companies. The prices we charge for our products and services depend on the relationship between the level of activity of E&P companies, or the demand of our potential and existing customers, and the supply of equipment and services available to such E&P companies from us and our competitors.

Our operating expenses consist primarily of variable costs, such as labor and third-party expenses. Labor-related expenses typically fluctuate with the utilization of our equipment and services. Expenses associated with services provided by third-parties typically increase with activity as well.

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are financial metrics used by management as (i) supplemental internal measures for planning and forecasting and for evaluating actual results against such expectations; (ii) significant criteria for incentive compensation paid to our executive officers and management; (iii) reference points to compare to the EBITDA and Adjusted EBITDA of other companies when evaluating potential acquisitions; and, (iv) assessments of our ability to service existing fixed charges and incur additional indebtedness.

We disclose and discuss EBITDA as a non-GAAP financial measure in our filings with the Securities and Exchange Commission. We define EBITDA as earnings (net income or loss) before interest, income taxes, and depreciation and amortization. Our measure of EBITDA may not be comparable to similarly titled measures presented by other companies, which may limit its usefulness as a comparative measure.

We also make certain adjustments to EBITDA for (i) non-cash charges and (ii) certain expenses, such as severance, legal settlements, and professional fees and other expenses related to transactions outside the ordinary course of business, to derive a normalized EBITDA run-rate ("Adjusted EBITDA"), which we believe is a useful measure of operating results and the underlying cash generating capability of our business.

Because EBITDA and Adjusted EBITDA are not measures of financial performance calculated in accordance with GAAP, these metrics should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP.

We believe EBITDA and Adjusted EBITDA are widely used by investors and other users of our financial statements as supplemental financial measures that, when viewed with our GAAP results and the accompanying reconciliation, provides additional information that is useful to gain an understanding of our ability to service debt, pay income taxes and fund capital expenditures. We also believe the disclosure of EBITDA and Adjusted EBITDA helps investors meaningfully evaluate and compare our cash flow generating capacity and performance from quarter-to-quarter and year-to-year.

Set forth below are the material limitations associated with using EBITDA and Adjusted EBITDA as non-GAAP financial measures compared to cash flows provided by and used in operating, investing and financing activities:

Management compensates for the above-described limitations in using EBITDA and Adjusted EBITDA as non-GAAP financial measures by only using EBITDA and Adjusted EBITDA to supplement our GAAP results.

The following table provides the detailed components of EBITDA and Adjusted EBITDA as we define that term for the three and nine months ended September 30, 2019 and 2018 (in thousands):

Adjusted EBITDA for the three months ended September 30, 2019 and 2018 was approximately $0.8 million and $1.3 million, respectively and Adjusted EBITDA for the nine months ended September 30, 2019 and 2018 was $2.6 million and $3.4 million, respectively. The decline in year-over-year Adjusted EBITDA was due primarily to a decrease in utilization of our solids control equipment and auxiliary surface rental equipment which was only partially offset by increases in pricing and utilization of our lead surface rental products.

General Trends and Outlook

Our business depends to a significant extent on the level of resource development activity and corresponding capital spending of E&P companies onshore in the U.S. These activity and spending levels are strongly influenced by the current and expected oil price. Oil prices have been and will continue to be volatile as major drivers determining the price of oil, including the rate of GDP growth in consuming nations and the political stability of oil-producing countries, are unpredictable.

Although oil prices rebounded more than 20.0% during the first nine months of 2019, the U.S. land-based drilling rig count (the “Rig Count”), which is a strong indicator of the overall activity of our customers, steadily declined during the same period to approximately 835 rigs from approximately 1,050 rigs at the beginning of 2019. We anticipate the Rig Count may decline even further as E&P companies continue to cut back on capital expenditures for drilling programs.

Given the declining Rig Count and the uncertainty regarding the current market environment, we have implemented a low-risk strategy. We will focus on (i) maintaining current pricing levels and increasing activity and utilization of our equipment, particularly with existing customers who are not reducing the number of rigs they operate and (ii) monitoring the utilization of our equipment daily in order to ensure high-cost sub-rented equipment is replaced with owned equipment or equipment sub-rented at more favorable rates whenever possible. We believe there is significant growth potential for our solids control product line as we currently have the capacity to more than double our existing solids control job count with insignificant capital expenditures. As new jobs are added, the income from such jobs will have a significant positive impact on financial performance as the variable costs associated with the rental of our solids control products are minimal. Variable costs associated with the rental of surface rental equipment are also minimal and we will seek to increase our surface rental activity; however, potential growth of our surface rental product line is more limited than growth of our solids control product line as our lead surface rental products, consisting primarily of tanks and pumps, are fully utilized and we are reluctant to increase our dependence on high cost sub-rental vendors. In an effort to alleviate the impact of this limitation, during the first six months of 2019, we invested heavily in 500bbl tanks, our lead surface rental product, which can either generate incremental rental income at higher margins by satisfying additional demand or generate cost savings by replacing equipment which is currently being sub-rented. In addition, beginning in the second quarter, we signed lease agreements for tanks and pumps from Permian Pelican Rentals, LLC (“PPR”), a related party, at day rates which are more favorable than the rates charged by our existing sub-rental vendors. With the addition of 60 owned tanks and 14 tanks from PPR during the first nine months of 2019, we have increased our average number of 500bbl round-bottom tanks generating revenue per day to approximately 290 during the third quarter of 2019 from approximately 260 during the first quarter of 2019. In addition, we have returned more than 20 sub-rented tanks to third-party vendors in the third quarter of 2019. We believe the combination of (i) increased contribution from our solids control product line as we improve utilization of our existing equipment fleet, (ii) increased surface rental activity using owned or less costly equipment, and (iii) decreased costs as sub-rented equipment is returned will result in increased margins during the remainder of the year and in 2020.

Results for the Three Months Ended September 30, 2019 Compared to the Three Months Ended September 30, 2018

The unaudited condensed consolidated financial statements for the three months ended September 30, 2018 have been restated due to an accounting error in connection with certain assets sold in 2016. (See further discussion in “Note 9 – Restatement of Prior Year Financial Statements” in the notes to our consolidated financial statements included elsewhere in this document).

The following table summarizes the change in our results of operations for the three months ended September 30, 2019 when compared to the three months ended September 30, 2018 (in thousands).